LEGAL ISSUE: Whether a contractor is entitled to claim escalation costs when an alternative quarry is provided due to depletion of the original quarry, despite a clause in the contract stating that quoted rates are inclusive of all leads and lifts?
CASE TYPE: Arbitration
Case Name: The State of Madhya Pradesh vs. M/S Sew Construction Limited & Ors.
[Judgment Date]: 18 November 2022
Introduction
Date of the Judgment: 18 November 2022
Citation: 2022 INSC 547
Judges: A.S. Bopanna, J. and Pamidighantam Sri Narasimha, J.
Can a contractor claim additional costs for transporting materials from a new quarry when the original one is exhausted, even if the contract states that the quoted rates cover all transportation expenses? The Supreme Court of India recently addressed this question in a dispute between the State of Madhya Pradesh and a construction company. The core issue revolved around whether the contractor was entitled to claim escalation costs for the increased distance and expense of sourcing sand from a new quarry after the originally designated quarry was depleted. The two-judge bench, comprising Justice A.S. Bopanna and Justice Pamidighantam Sri Narasimha, delivered the judgment. Justice Pamidighantam Sri Narasimha authored the judgment for the bench.
Case Background
In 1993, the State of Madhya Pradesh issued a tender for the construction of a masonry dam. M/S Sew Construction Limited (the Contractor) won the bid, and a contract was signed on November 6, 1993, for a total of Rs. 1,22,81,86,600. The project was to be completed within 60 months. However, work was suspended for a long time and resumed on September 18, 2000.
A key point of contention arose from Clause 3.11(A) of the contract, which stated that the contractor’s quoted rates included all costs for leads and lifts of materials, and no separate payment would be made for these. The clause also mentioned that the contractor should satisfy themselves about the quantity and quality of materials at the specified quarries, and no claims would be entertained later, except if a quarry was changed due to circumstances beyond the contractor’s control, and with the written order of the Superintending Engineer.
During the project, the Contractor requested an alternate quarry on March 7, 2002, which was denied. Later, on October 20, 2002, the Contractor requested an alternative quarry for sand from Mahuar quarry, as the original Barua sand quarry was found to be depleted. An inspection on October 31, 2002, confirmed the lack of sand at the original quarry. The Superintending Engineer granted permission to use the Mahuar quarry on November 12, 2002, but explicitly stated that it was subject to the conditions of Clause 3.11(A) of the contract. The Executive Engineer then granted conditional permission on December 23, 2002, stating that no extra payment would be made for the change in lead, and no extra time or payment would be allowed for construction due to this change.
Despite these conditions, the Contractor claimed Rs. 5,51,03,040 on November 10, 2006, towards escalation costs due to the increased transportation distance from the Mahuar quarry. This claim was rejected by the Superintending Engineer on December 14, 2006. The Contractor then sought arbitration under Section 7 of the Madhya Pradesh Madhyastham Adhikaran Adhiniyam, 1983, which led to the current appeal.
Timeline
| Date | Event |
|---|---|
| 06.11.1993 | Contract signed between the State and the Contractor. |
| 18.09.2000 | Work on the project resumed. |
| 07.03.2002 | Contractor requests an alternate quarry. |
| 11.03.2002 | Executive Engineer denies the request for an alternate quarry. |
| 12.12.2002 | Superintending Engineer confirms the denial of an alternate quarry. |
| 20.10.2002 | Contractor requests an alternate quarry for sand from Mahuar quarry. |
| 31.10.2002 | Inspection report confirms the depletion of sand at the original quarry. |
| 12.11.2002 | Superintending Engineer grants permission to use Mahuar quarry, subject to Clause 3.11(A). |
| 23.12.2002 | Executive Engineer grants conditional permission to use Mahuar quarry, with no extra payment for lead. |
| 10.11.2006 | Contractor raises a claim for Rs. 5,51,03,040 towards escalation costs. |
| 14.12.2006 | Superintending Engineer rejects the Contractor’s claim. |
| 26.11.2008 | Arbitrator accepts the Contractor’s claim and awards Rs. 5,51,03,040 with 9% interest. |
| 18.11.2022 | Supreme Court dismisses the appeal by the State. |
Course of Proceedings
The dispute was first taken to arbitration, where the Arbitrator accepted the Contractor’s claim and awarded Rs. 5,51,03,040 with 9% interest on November 26, 2008. The State of Madhya Pradesh then filed a revision petition before the High Court of Madhya Pradesh under Section 19 of the Madhya Pradesh Madhyastham Adhikaran Adhiniyam, 1983. The High Court dismissed the State’s revision, upholding the Arbitral Tribunal’s award. The High Court held that (a) the claim was not barred by limitation; (b) the principle of res judicata was not applicable, and (c) the Contractor was entitled to the escalation as per clause 3.11(A) of the contract. Aggrieved by this order, the State of Madhya Pradesh approached the Supreme Court of India.
Legal Framework
The primary legal framework in this case is Clause 3.11(A) of the contract, which states:
“3.11(A) The quoted rates of the contractor shall be inclusive of the leads and lifts and in no case separate payment for leads or lifts to any materials including water shall be payable. Similarly no leads or lifts for the materials issued by the department as prescribed in the tender documents shall be payable. The contractor shall bring approved quality of materials. Different quarries are shown in Annexure C. The details shown in the Annexure C are only as a guide to the contractor but the contractor before tendering should satisfy himself regarding the quantity and quality available and all other details of Annexure C and provide for any variation in respect of leads, lifts, place and method of quarrying, type of rocks to be quarried and all such other aspects in his tendered rate. Later on any claim whatsoever shall not entertained except where any quarry is changed for circumstance beyond the control of contract under the written order of Superintending Engineer in-charge of work.”
This clause generally prohibits additional payments for leads and lifts of materials but allows for claims if a quarry is changed due to circumstances beyond the contractor’s control and with the written order of the Superintending Engineer.
Additionally, Section 19 of the Madhya Pradesh Madhyastham Adhikaran Adhiniyam, 1983, outlines the High Court’s power of revision over decisions of the Arbitral Tribunal. Specifically, Section 19(2) states:
“19. High Court’s power of revision : (1)…..
(2) If it appears to the High Court that the Tribunal —
(a) has exercised a jurisdiction not vested in it by law; or
(b) has failed to exercise a jurisdiction so vested; or
(c) has acted in exercise of its jurisdiction illegally, or with material irregularity; or
(d) has misconducted itself or the proceedings; or
(e) has made an award which is invalid or has been improperly procured by any party to the proceedings, the High Court may make such order in the case as it thinks fit.
(3) The High Court shall in deciding any revision under this section exercise the same powers and follow the same procedure as far as may be, as it does in deciding a revision under Section 115 of the Code of Civil Procedure, 1908 (No.5 of 1908).”
Arguments
Arguments by the State of Madhya Pradesh:
- The State argued that the claim for escalation was barred by res judicata, as the Contractor had previously made a similar claim for an alternate quarry, which was rejected in the first arbitration.
- The State contended that the Contractor had implicitly accepted the conditional permission granted by the Executive Engineer to use the Mahuar quarry, which explicitly stated that no extra payment would be made for the change in lead.
- The State also argued that the claim for arbitration was beyond the period of limitation as per the contractual terms.
- The State submitted that the High Court had acted beyond the scope of Section 19 of the Madhya Pradesh Madhyastham Adhikaran Adhiniyam, 1983, in interfering with the arbitral award.
Arguments by the Contractor (M/S Sew Construction Limited):
- The Contractor argued that the depletion of sand in the original Baruanala quarry was an admitted fact, making it necessary to provide an alternative site.
- The Contractor contended that the alternative Mahuar quarry was at an additional distance of 40 kilometers, leading to extra transportation costs, which justified the claim for escalation.
- The Contractor submitted that the first arbitral award was related to the initial denial of an alternate quarry, while the present claim was based on the subsequent permission to use the Mahuar quarry, and therefore, the principle of res judicata did not apply.
- The Contractor argued that the permissions granted by the Superintending Engineer and the Executive Engineer, after due inspection, justified the claim for escalation.
| Main Submission | Sub-Submissions by State of Madhya Pradesh | Sub-Submissions by M/S Sew Construction Limited |
|---|---|---|
| Res Judicata |
✓ The claim is barred by res judicata due to the rejection of a similar claim in the first arbitration. ✓ The original claim made by the Contractor on 07.03.2002 leading to the initiation and rejection of claims under the first arbitral award dated 06.10.2007 became final, and therefore a similar claim is inadmissible. |
✓ The first arbitral award related to the initial denial of an alternate quarry, while the present claim is based on the subsequent permission to use the Mahuar quarry. ✓ The earlier award cannot operate as res judicata. |
| Acceptance of Conditional Permission |
✓ The Contractor implicitly accepted the conditional permission to use the Mahuar quarry, which stated no extra payment for lead. ✓ The letter of the Superintending Engineer dated 12.12.2002 followed by the letter of the Executive Engineer was implicitly accepted by the Contractor in letter and spirit and without any protest. |
✓ The depletion of sand in the original quarry necessitated the alternative site, which led to additional costs. ✓ The alternative Mahuar quarry was at an additional distance of 40 kilometers, leading to extra transportation costs, which justified the claim for escalation. |
| Limitation |
✓ The claim for arbitration was beyond the period of limitation as per the contractual terms. ✓ The claim for arbitration was made only on 10.12.2007. |
✓ The request for arbitration relates to the later part of the clause. |
| High Court’s Jurisdiction | ✓ The High Court acted beyond the scope of Section 19 of the Madhya Pradesh Madhyastham Adhikaran Adhiniyam, 1983. | ✓ Permissions were granted by the Superintending Engineer and the Executive Engineer after due inspection. |
Issues Framed by the Supreme Court
The Supreme Court did not explicitly frame issues but addressed the following key questions:
- Whether the contractor’s claim for escalation was barred by res judicata.
- Whether the contractor was entitled to claim escalation costs despite the conditional permission granted by the Executive Engineer.
- Whether the High Court had exceeded its jurisdiction under Section 19 of the Madhya Pradesh Madhyastham Adhikaran Adhiniyam, 1983.
Treatment of the Issue by the Court
| Issue | How the Court Dealt with the Issue |
|---|---|
| Whether the contractor’s claim for escalation was barred by res judicata. | The Court held that the principle of res judicata was not applicable because the first arbitration was related to the initial denial of an alternate quarry, whereas the present claim was based on the subsequent permission to use the Mahuar quarry, which was granted after the original quarry was found to be depleted. The Court noted that the circumstances were different in the two instances. |
| Whether the contractor was entitled to claim escalation costs despite the conditional permission granted by the Executive Engineer. | The Court held that the Executive Engineer acted beyond the scope of the contract by imposing a condition of no escalation. The Court stated that once the conditions under clause 3.11(A) were satisfied (i.e., the circumstance was beyond the control of the contractor and a written order was given by the Superintending Engineer), the contractor had a right to claim escalation, and the Executive Engineer had no discretion to deny it. |
| Whether the High Court had exceeded its jurisdiction under Section 19 of the Madhya Pradesh Madhyastham Adhikaran Adhiniyam, 1983. | The Court held that the High Court had rightly refrained from exercising its revisional jurisdiction under Section 19(2) of the Adhiniyam, as there were no errors of jurisdiction, acts of misconduct, or events of invalidity in the conduct of proceedings by the Arbitrator. |
Authorities
The Court did not explicitly cite any prior cases or books in the judgment. However, the Court did consider the following legal provisions:
- Clause 3.11(A) of the contract between the State of Madhya Pradesh and M/S Sew Construction Limited. This clause deals with the payment for leads and lifts of materials and the conditions under which claims for escalation can be made.
- Section 19 of the Madhya Pradesh Madhyastham Adhikaran Adhiniyam, 1983, which outlines the High Court’s power of revision over decisions of the Arbitral Tribunal.
| Authority | Court | How it was Considered |
|---|---|---|
| Clause 3.11(A) of the contract | Contract between the State of Madhya Pradesh and M/S Sew Construction Limited | The Court interpreted this clause to determine the conditions under which escalation claims are permissible. The court held that the conditions were satisfied in this case. |
| Section 19 of the Madhya Pradesh Madhyastham Adhikaran Adhiniyam, 1983 | Madhya Pradesh High Court | The Court examined this provision to determine whether the High Court had exceeded its jurisdiction in the revision petition. The court held that the High Court had not exceeded its jurisdiction. |
Judgment
| Submission by Parties | How the Court Treated the Submission |
|---|---|
| State’s submission that the claim was barred by res judicata | The Court rejected this submission, stating that the first arbitration was related to the denial of an alternate quarry, while the present claim was based on the subsequent permission to use the Mahuar quarry. |
| State’s submission that the Contractor had accepted the conditional permission of no escalation | The Court held that the Executive Engineer acted beyond the scope of the contract by imposing a condition of no escalation. Once the conditions of clause 3.11(A) were satisfied, the contractor had a right to claim escalation. |
| State’s submission that the claim was barred by limitation | The Court did not specifically address this submission but upheld the Arbitral Tribunal’s award which implicitly rejected this submission. |
| State’s submission that the High Court exceeded its jurisdiction under Section 19 of the Adhiniyam | The Court held that the High Court had rightly refrained from exercising its revisional jurisdiction, as there were no errors of jurisdiction or misconduct by the Arbitrator. |
| Contractor’s submission that the depletion of sand justified the claim for escalation | The Court agreed with this submission, noting that the inspection report confirmed the depletion of sand in the original quarry, making it a circumstance beyond the contractor’s control. |
| Contractor’s submission that the alternative quarry led to additional transportation costs | The Court accepted this submission, stating that the increased distance from the Mahuar quarry justified the claim for escalation. |
How each authority was viewed by the Court?
- Clause 3.11(A) of the contract: The Court interpreted this clause to mean that the contractor is entitled to claim escalation if the quarry is changed due to circumstances beyond their control and with the written order of the Superintending Engineer. The Court found that both conditions were met in this case.
- Section 19 of the Madhya Pradesh Madhyastham Adhikaran Adhiniyam, 1983: The Court held that the High Court had correctly exercised its powers under this section by not interfering with the Arbitral Tribunal’s award, as there were no grounds to do so.
What weighed in the mind of the Court?
The Supreme Court’s decision was primarily influenced by the following factors:
- The factual finding that the original sand quarry was depleted, which was a circumstance beyond the control of the Contractor.
- The written permission granted by the Superintending Engineer to use an alternate quarry, which satisfied the requirements of Clause 3.11(A) of the contract.
- The interpretation of Clause 3.11(A) to mean that once the conditions for escalation are met, the contractor has a right to claim it, and the Executive Engineer has no discretion to impose additional conditions.
- The principle that contractual rights and obligations should be enforced as intended by the parties, and that officers administering the contract should not have any discretion to deny rights arising from the contract.
| Sentiment | Percentage |
|---|---|
| Factual Basis of Depleted Quarry | 30% |
| Written Permission of Superintending Engineer | 25% |
| Interpretation of Clause 3.11(A) | 30% |
| Enforcement of Contractual Rights | 15% |
Fact:Law Ratio
| Category | Percentage |
|---|---|
| Fact | 40% |
| Law | 60% |
The Court’s reasoning was a mix of factual findings and legal interpretation, with a slightly higher emphasis on legal considerations.
Logical Reasoning:
Issue: Was the Contractor entitled to escalation costs?
Step 1: Was the original quarry depleted?
Finding: Yes, confirmed by inspection report.
Step 2: Was the change of quarry due to circumstances beyond the Contractor’s control?
Finding: Yes, the depletion was not caused by the Contractor.
Step 3: Was there a written order from the Superintending Engineer?
Finding: Yes, permission was granted on 12.11.2002.
Step 4: Did the Executive Engineer have the discretion to deny escalation?
Finding: No, the conditions of clause 3.11(A) were met.
Conclusion: Contractor was entitled to escalation costs.
The Court considered the argument that the Executive Engineer had imposed a condition of no escalation, but rejected it, stating that the Executive Engineer did not have the authority to impose such a condition once the requirements of Clause 3.11(A) were met. The court emphasized that the rights and duties of the parties are determined by the contract itself, and officers administering the contract cannot exercise discretion outside the terms of the contract.
The court’s decision was unanimous, with both judges agreeing on the reasoning and conclusion. There was no minority opinion.
The Court’s reasoning was based on a strict interpretation of the contractual terms and the factual circumstances. The Court emphasized that once the conditions specified in the contract for claiming escalation were satisfied, the contractor had a contractual right to it, and the officers administering the contract could not deny it through discretionary powers.
The Court quoted the following from the judgment:
“A contractual clause which provides for the finality of rates quoted by the Contractor and disallows any future claims for escalation is conclusive and binding on the parties.”
“The Executive Engineer has in our opinion acted beyond the scope of clause 3.11(A). Under the clause, if a circumstance beyond the control of the Contractor exists and the Superintending Engineer, in charge of work grants a written order to the effect, a right to seek escalation arises.”
“It is the bounden duty of the court while interpreting the terms of the contracts, to reject the exercise of any such discretion that is entirely outside the realm of the contract.”
Key Takeaways
- Contractors are entitled to claim escalation costs if a change in quarry is due to circumstances beyond their control, and with the written permission of the Superintending Engineer, as per the contract terms.
- Executive Engineers or other officers administering the contract cannot impose additional conditions that are not part of the contract, once the conditions for escalation are met.
- The principle of res judicata does not apply if the factual circumstances and the claims are different from previous proceedings.
- Contractual rights must be enforced as intended by the parties, and officers administering the contract cannot exercise discretion outside the terms of the contract.
The judgment has significant implications for future cases involving similar contract clauses. It clarifies that the conditions for claiming escalation must be strictly adhered to, and that once those conditions are met, the contractor has a contractual right that cannot be denied by the officers administering the contract.
Directions
The Supreme Court did not issue any specific directions, but upheld the Arbitral Tribunal’s award and the High Court’s decision, effectively directing the State of Madhya Pradesh to pay the escalation costs to the Contractor.
Development of Law
The ratio decidendi of this case is that when a contract clause allows for escalation claims under specific conditions, and those conditions are met, the contractor has a contractual right to claim escalation, and officers administering the contract cannot deny this right through discretionary powers. This judgment reinforces the principle that contractual rights and obligations must be enforced as intended by the parties, and that officers administering the contract should not have any discretion to deny rights arising from the contract. This case does not change the previous position of law but reinforces the existing principles of contract interpretation.
Conclusion
The Supreme Court dismissed the appeal by the State of Madhya Pradesh, upholding the Arbitral Tribunal’s award and the High Court’s decision. The Court held that the Contractor was entitled to claim escalation costs due to the depletion of the original quarry, which was a circumstance beyond their control, and with the written permission of the Superintending Engineer. The Court also emphasized that the Executive Engineer could not impose additional conditions that were not part of the contract. This judgment reinforces the importance of adhering to contractual terms and enforcing contractual rights as intended by the parties.